Six newly public companies including Facebook Inc. (FB:US) will probably join the Russell 1000 Index amid the smallest annual shift in the gauge of large U.S. companies since at least 2004, according to Credit Suisse Group AG.
Stocks representing 1.5 percent of the index’s value will be swapped during Russell’s annual rebalancing on June 22, the smallest proportion in eight years, Credit Suisse estimates. The preliminary list of changes for Russell Investments’ gauges including the Russell 1000 and Russell 2000 Index will be announced after the close of U.S. trading today.
Fewer changes may mean cost savings for fund managers because they won’t have to trade as much to match Russell’s adjustments. At the same time, brokerages and exchanges may miss out on volume at a time when their profits suffer from a slowdown in transactions. The annual revisions usually spur one of the busiest sessions of the year. Russell’s global stock indexes are used by investors with $3.9 trillion in assets.
“If you don’t have a lot of need for changes, then the demand won’t be there, then you wouldn’t have these huge up volume events like we traditionally have,” Jason Cooper, who helps oversee $2.5 billion in South Bend, Indiana at 1st Source Investment Advisors, said in a phone interview. For some managers, “it would be a breath of fresh air” amid rising market volatility, he said. “It requires less of them to make changes that could be a problem or be detrimental to the weighting that they’re currently managing.”
Besides adding and subtracting companies from gauges such as the Russell 1000 Index (RIY) and Russell 2000 Index, the firm also reclassifies companies as growth stocks, value stocks or blends of the two based on changes in their valuation, historic sales growth and projected earnings over the past year. Exxon Mobil Corp., now represented in both value and growth indexes, will probably be treated only as value following the annual review, Bank of America Corp. and Credit Suisse said.
Last year, 10.2 billion shares changed hands on U.S. exchanges on June 24, the rebalancing day, producing the 18th- highest total in 2011, according to data compiled by Bloomberg. In four of the previous five years, rebalancing day was in the top 10.
Stock volume is dwindling as Investment Company Institute data show five years of withdrawals from U.S. equity mutual funds. An average of 6.83 billion shares changed hands daily this year, according to data compiled by Bloomberg on exchange- listed securities. That compares with 7.8 billion last year, 8.52 billion in 2010 and 9.77 billion in 2009.
Facebook, the world’s largest social-networking company that raised $16 billion last month, will join the Russell 1000, according to BlackRock Inc., Credit Suisse, Investment Technology Group Inc. and Macquarie Group Ltd. The stock, which has sunk 31 percent since its debut, would account for 0.08 percent of the rebalanced Russell 1000, resulting in buying of 13.5 million shares, Macquarie estimates.
Five more IPOs will enter the Russell 1000, according to Credit Suisse. They include Vantiv Inc., a payment processor; Allison Transmission Holdings Inc., a maker of transmissions for trucks and buses; software maker Splunk Inc.; MRC Global Inc., an energy products and services company; and Retail Properties of America Inc., a real estate investment trust.
Russell Investments, a Seattle-based company owned by Northwestern Mutual Life Insurance Co., started adding IPOs on a quarterly, rather than annual basis in recent years to help reduce turnover on the rebalancing day, according to a statement on Russell’s website.
Banks, insurers and brokerages will see their weighting increase the most among 10 industries in the Russell 1000 as companies such as MFA Financial Inc. (MFA:US) migrate from the Russell 2000 of smaller stocks, according to ITG and Credit Suisse. ITG says technology companies will see the biggest decline, while Credit Suisse said it would be the consumer-staples group.
The Russell changes may have the potential to increase price swings on the rebalancing day, according to Rene Casis, who manages exchange-traded funds based on Russell indexes in San Francisco for BlackRock. His firm runs 16 Russell-based ETFs with combined assets of $71 billion.
“It’s definitely a large event,” Casis said in a phone interview on June 6. “Given the compressed nature of this trading event, there is temporary volatility that can occur.”
To contact the reporter on this story: Lu Wang in New York at firstname.lastname@example.org
To contact the editor responsible for this story: Nick Baker at email@example.com